(Kitco News) - Once again, the gold market is ending the week at a critical juncture as it tests crucial support at $2,400 an ounce.
After holding support last Friday, the precious metal started this week strong and managed to rally to a new all-time high above $2,480 an ounce. However, bullish momentum has quickly faded as the market has given up all its gains and looks to end the week in negative territory for the first time in three weeks.
August gold futures last traded at $2,406.20 an ounce, down 2% on the day and down half a percent from last Friday.
In an interview with Kitco News, James Stanley, Senior Strategist at Forex.com, said that this pullback makes sense as the price was looking overbought. He added that $2,500 is another critical psychological level and the risk-reward profile was unbalanced.
“Right now, we need to see if $2,400 will be defended, and we just don’t have enough information. If it is defended, that will set up a strong bullish case for gold,” he said. “I am still bullish for gold because its price action is supported by strong fundamentals.”
While $2,400 is a near-term line in the sand, Stanley said that gold prices would need to break support at $2,300 an ounce to weaken the bullish sentiment in the marketplace.
Commodity analysts at TD Securities also see potential for lower prices in the near term as investors take profits after seeing fresh all-time highs.
“We reiterate that positioning risks are asymmetrically skewed to the downside for the first time in months,” the analysts said in a note Friday. “CTAs are now likely to sell over the next several sessions, even in a big uptape. In fact, rising asset volatility may be most likely to contribute to pain for trend-following algos. Our analysis of flows suggests the window for downside is open in the yellow metal, and a pause in gold’s bull market could be in store.”
Alex Kuptsikevich, Senior Market Analyst at FxPro, said that a synchronized pullback in gold and U.S. equity markets does not bode well for the precious metal.
“Pullbacks after making new highs have been a typical pattern for gold in recent months, with similar retreats in May, April, March, and December. The highs were followed by a pullback, which subsided within about two weeks, leading to a stabilization of the price and a return to the upside,” he said. “However, bull markets do not last forever, and traders should look for signs that this bullish trend is reversing.
“Next week could determine the momentum for months to come. Drops of more than 3% next week could repeat the pattern of 2020 and 2022 with protracted corrections of more than six months. Most worrisome would be a repeat of the 2011 pattern when the high of $1,921 was followed by a 20% sell-off over four weeks. This peak was not rewritten until nine years later, and from the global peak to the global bottom, the value of a troy ounce almost halved, declining for more than four years,” Kuptsikevich added.
Along with gold’s technical outlook, investors will also be paying attention to fundamental economic data as key inflation numbers are released next week.
Analysts note that gold currently has a strong correlation with interest rate expectations. Gold’s rally to new all-time highs has coincided with expectations that the Federal Reserve will start its easing cycle in September.
According to the CME’s FedWatch Tool, markets see a more than 90% chance of a rate cut by the end of the summer.
Stanley said that the only thing that could derail gold’s uptrend is higher inflation, which would cause investors to question the potential rate cut. While this scenario is unlikely, he said it remains a risk.
In a recent interview with Kitco News, Thorsten Polleit, Honorary Professor of Economics at the University of Bayreuth and publisher of the BOOM & BUST report, said that because of the falling money supply, he expects inflation pressures to continue to ease, giving the Federal Reserve room to cut rates.
Investors will have to wait until Friday to see June’s core Personal Consumption Expenditures Index. Last month, the Federal Reserve’s preferred inflation gauge showed inflation rising by 2.6%.
Along with the key inflation data, markets will get the first look at the second-quarter Gross Domestic Product.
In central bank activity, the Bank of Canada will make its monetary policy decision on Wednesday. According to economists, weaker inflation data gives the central bank room to cut its interest rate.
Economic data to watch next week
Tuesday: Existing home sales
Wednesday: Bank of Canada monetary policy decision, Flash PMI, new home sales
Thursday: Advanced Q1 GDP, durable good orders, weekly jobless claims
Friday: Core PCE, personal income and spending
